Oversubscription adds reinsurance cost, shows market inefficient: Tremor

Oversubscription in reinsurance placements is a sign of an inefficient market, as it suggests that in many cases cedents are unable to optimally price their risk, according to programmatic insurance and reinsurance risk transfer marketplace insurtech Tremor Technologies Inc.

Tremor Technologies offers a platform designed to bring efficiency to the placement and syndication of large insurance, reinsurance, retrocession and other risk transfer arrangements.

Operating on an auction basis, Tremor allocates risk to the most appropriate capital based on parameters related to supply and demand, ensuring optimal placement of the program at true market clearing prices. Today, the way reinsurance placements work, is not always achieving these goals, Tremor believes.

The company is leveraging the data it receives through auctions it hosts to provide some insight into how the market is functioning, believing that it is only through the use of advanced technology to optimise the last-mile of the placement process and distribute risk to capital, that truly efficient reinsurance placement can occur.

Oversubscription in the market forces cedents to pay more and possibly also price other cedents out of the market entirely, Tremor believes.

Tremor explains that its marketplace data shows even a moderate oversubscription of a placement can result in a significant impact on the cedent’s cost.

Tremor says that a program that is oversubscribed by 25% is likely to be priced at least 10% above the where it would have precisely filled, using an efficient technology to optimise the placing of it.

Which in itself implies a substantial inefficiency in the reinsurance market, that may even constrain its opportunities and growth.

Tremor calls this “the cost of oversubscription” which it believes is a factor whether a reinsurance placement is only slightly oversubscribed, or very over filled.

“This inefficiency is large enough that eliminating it, as Tremor’s marketplace platform does, will meaningfully reduce reinsurance overhead and open the market to entrants,” explained Chris Wilkens, Chief Product Officer at Tremor.

Tremor’s risk placement marketplace finds market clearing prices through the precise matching of supply and demand, while still accounting for market’s sophisticated preferences and constraints which they can control.

As a result of this, given the true marketplace dynamics of an auction based platform like Tremor, any insurance or reinsurance transactions priced and placed using them should never be oversubscribed, as the technology finds the optimal distribution across markets at a single uniform clearing price (based on the constraints and preferences set).

Tremor’s analysis is based on real transaction aggregate supply data gathered from its platform, saying that this identifies the overpayment associated with an oversubscription rate for each product transacted in ways the traditional market simply cannot quantify.

The company has gone into much more detail in this blog post, which makes for interesting reading.

Tremor Founder & CEO Sean Bourgeois further explained to us, “We know that only a fraction of catastrophe risk is covered today. Reinsurers who aggregate globally will always be better-suited to bear risk than original risk holders, so it must be that risk remains uncovered as a result of transaction costs, overhead, and other barriers.

“Reducing these barriers significantly stands to substantially expand the global reinsurance market.

“The inefficiency in today’s firm order terms process hurts both sides of the market. Cedents directly experience higher prices since they must ultimately pay to cover the cost of any market inefficiencies. On the other side of the market, reinsurers costs are high because of the long and uncertain process of selling protection.

“Eliminating the inefficiencies will benefit everyone and expand the market — current cedents will benefit from better pricing, new cedents will enter the market, and reinsurers will see enhanced returns through the combination of lower costs and increased cedent demand.”

This is the promise of technology, which Tremor and other start-ups are embracing to provide a more efficient and effective market for re/insurance placement.

For brokers, while understanding that how they’ve been placing programs may be sub-optimal will be challenging to accept, it’s important they embrace technology to improve the outcome of placements for their clients. Which will also allow them to focus on the important origination, sourcing, analysis, structuring and relationship aspects of the market.

It’s interesting to have these insights into the reinsurance placement process itself, as prior to the existence of technology platforms such as Tremor there wasn’t any clear visibility of this kind of data, at least not from an independent source.

Obviously Tremor is pushing its technology here, but insights like this are extremely beneficial for cedants, markets and brokers as well.

It’s only through understanding where efficiencies lie in the risk transfer process that they can be ironed out, smoothed and removed, resulting in better execution all around and lowering everyone’s cost-of-capital in the process.